Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
The Heterogeneous Effects of Government Spending : It’s All About Taxes
This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger multipliers. Finally, we provide evidence in support of the model’s cross-sectional implications.
Cite this item
Axelle Ferrière & Gaston Navarro, The Heterogeneous Effects of Government Spending : It’s All About Taxes, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1237, 22 Aug 2018.
- D30 - Microeconomics - - Distribution - - - General
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- N42 - Economic History - - Government, War, Law, International Relations, and Regulation - - - U.S.; Canada: 1913-
Keywords: Fiscal stimulus ; Government spending ; Transfers ; Heterogeneous agents
This item with handle RePEc:fip:fedgif:1237
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